1. Field of the Invention
The present invention relates to computer systems and corresponding methods and computer program products for processing orders in a security trading system, and in particular to order processing techniques in which orders are matched beyond their visible limits disclosed to the market for execution purposes.
2. Description of the Related Art
Besides exchange floor trading, electronic trading systems have become important places where securities are bought and sold. A known trading platform for processing electronic orders is Xetra (Exchange Electronic Trading), which is a distributed system whose components are connected according to the client-server principle. Some of the Xetra functionality is decentralized on the participants' installations, so-called front ends, and some of it is implemented centrally on the Xetra back end of the exchange. The participants' front end installation can also be set up based on the client-server principle, and the use of a programmable interface makes the front end an open system to which any number of different participants' applications can be connected or added on.
A typical trading platform is shown in FIG. 1. Customer computers 110 and 130, the front ends, are connected to the central order book exchange system 140 representing the back end of the trading platform through a WAN (Wide Area Network) 135 which spans a large geographic area. The internet is an example of a WAN 135. The customer computers can be stand-alone systems, as for instance the customer computer 130, or have a distributed system architecture as for customer computer 110. Distributed customer computers 110 usually include a number of customer clients 115 connected to a customer server 125 through a LAN (Local Area Network) 120 that is confined to a building or a group of buildings, e.g. the branches of a bank. The customer server 125 is coupled to the WAN 135 for communicating with the back end 140.
The central order book exchange system 140 comprises a trading system 145. The trading system 145 authenticates the remote customer computers 110 and 130 and stores the orders received there from over the WAN 135. It then matches the orders, executes suiting ones and clears the trades simultaneously. The trading system 145 also reports the last sale as well as all orders as they are received and notifies the traders at the remote terminals 110 and 115 of filled or unfilled orders. It can access its memory to report various market conditions and transactions and maintains a detailed trade history for each trade member. Finally, it provides the necessary trade data for settlement and compliance with the rules of the exchange.
Further, the central order book exchange system 140 may include a clearing system 150 connected to the trading system 145 and the customer computers 110 and 130 via the WAN 135 for clearing all trades based upon the exchange rules. A compliance system 155 within the central order book exchange system 140 communicates with the trading system for tracking and reporting the trading activities of each trade member as well as detecting trading irregularities. It provides information to a control terminal 160 to answer inquiries from exchange officers who ensure that the system rules are being complied with. A live surveillance system 165 is coupled to the trading system 145 to enable exchange officers to review all information relating to trading.
With Xetra, all market participants have equal access to the trading platform regardless of their geographic location. Unlike exchange floor trading, electronic order processing makes it possible for orders to be entered in the system and automatically matched. Further, trading in equities and warrants is possible on a single trading platform. It is further possible to individualize transaction requests with regard to validity and way of execution. Selection between limit and market orders takes into consideration the different demands of the market participants as to the speed of order execution.
One basis of securities trading worldwide, no matter whether the trading takes place on a regulated exchange or other marketplaces, is order book trading. In order book trading, orders placed by investors in a given security form an order book and are executed according to well-defined principles, usually to price-time priority, i.e. according to the limit of the order and the time the order has been entered into the trading system. The order with the highest priority will be the first to be executed if an execution becomes possible. Executions are possible if the limit of the order with the highest priority on the buy side of the order book is higher than or equal to the order limit with the highest priority on the sell side of the order book. The execution or matching of orders also follows well-defined principles where the prevailing trading form also influences the exact procedure such as continuous trading and auction trading.
Exposing large trading interests to a relevant market causes adverse price effects, also referred to as the market impact, by information spillover to the disadvantage of the exposed trading interests. In addition, large trading interests are moving away the opposite market side by own trading activity deteriorating their overall execution price. For these market conditions, traders are reluctant to reveal their large trading interests all at once to avoid market impact costs, and have to work total trading interests in smaller orders over time in anonymous order book trading or bilaterally search for counterparties off the order book and execute the interests in non-anonymous over-the-counter markets.
Further, when entering large trading interests as patient limit orders or aggressive market orders, i.e. unlimited orders that are to be executed at the next price determined, any trader faces the problem either to accept market impact costs by aggressively matching his trading interests or to risk opportunity costs by patiently waiting in the order book for execution.
In order to address the above disadvantages, prior art trading systems already provide an extended set of order types. Such conventional approaches are illustrated in FIG. 2.
FIG. 2 schematically depicts the content of an order book according to prior art. The order book consolidates trading interests by buy orders 210 to 250 and sell orders 260 to 270 on two market sides: buy orders 210 to 250 on the bid market side and sell orders 260 to 270 on the ask market side. The orders comprise a number of characterizing parameters, e.g. parameters representing the order size or limit. The characterizing parameters of an order can be visible to all the customers using the securities trading system or hidden from (invisible to) part of the customers, e.g. from all the customers except the originator of the order. Order sizes, i.e. the number of shares to be bought or sold also referred to as order volumes, are aggregated by each price limit and buy (sell) orders are displayed in descending (ascending) order by their visible price limit LV in the order book with their aggregated visible size. The order queue on each market side builds the market depth. The distance between the visible limits of the highest buy order 250 and the lowest sell order 260 marks the inside market or quoted spread. Thus, in the example depicted in FIG. 2, the inside market extends from 54.16 to 54.19.
Order execution and price discovery in continuous electronic order book trading in prior art always takes place at the inside market and usually follows price-time priority in matching.
The extended set of order types in electronic order book trading comprises iceberg orders. An iceberg order 210 comprises a visible limit LV, a visible peak size, and a hidden size as characterizing parameters. The overall volume of the iceberg order 210 is the sum of the peak size and the hidden size. Only the visible limit and the peak size are disclosed to the market. The hidden size remains undisclosed, although available for matching in continuous trading if the order is at the inside market and auction trading. Once the peak size is fully executed, it gets refreshed out of the hidden size of the iceberg order 210.
Discretionary orders 240 are characterized by a volume V, a visible limit LV, and a hidden limit LH. While the volume V and the visible limit LV are disclosed to the market, the hidden limit LH remains undisclosed to the market. A discretionary order 240 can be matched not only with contra-orders within the visible limit LV, but also with contra-orders between the visible limit LV and the hidden limit LH. Accordingly, the discretionary buy order 240 of the example depicted in FIG. 2 could be executed against the sell order 260.
Finally, the extended set of order types used in conventional security trading comprises pegged orders. A pegged order 250 comprises a visible limit LV floating with the market in a security trading system. A pegged order 250 can be pegged to a market characterizing price, e.g., the limit of the best order among the remaining orders of the same market side, the limit of the best order on the opposite market side, or the middle of the inside market. By means of a distance parameter Δ, a fixed distance to the market characterizing price the pegged order 250 is pegged to can be specified so that the pegged order 250 floats with the market characterizing price, always staying at the specified distance therefrom. In the example illustrated in FIG. 2, the pegged buy order 250 is pegged to the remaining best buy order 230 by a distance of 0.02. Besides the distance parameter Δ, a pegged order 250 comprises an ultimate limit Lult acting as a constraint on how far the visible limit can float. A pegged order 250 can be executed only against contra-orders within the visible limit LV.
According to prior art, electronic order book trading enables buy (sell) orders to match exclusively at the best ask (bid) in continuous trading. Price formation and order matching takes place at the inside market only. This usually leads to the disadvantage that orders within the opposite market depth cannot participate in order matching whereby the time an order is patiently waiting in the order book for execution is increased. Therefore, conventional electronic order book trading still causes considerable opportunity costs.
Further, in prior art security trading systems, only front-end functionality is provided, i.e. an order, even though containing hidden parameters, can only be matched with visible parameters of the contra-orders within the order book. This may lead to the problem that an order is not executed since the visible limits of the opposite market side do not match the visible or hidden limit of the order, although a hidden limit of the opposite market side would have matched. Thereby, the time the order is patiently waiting in the order book for execution is increased again resulting in opportunity costs which can be avoided by the proposed Volume Discovery back-end functionality.